Seller financing (often referred to as a seller note) is a common deal structure in mergers and acquisitions where the seller agrees to defer receipt of a portion of the purchase price and instead gets paid over time. Rather than receiving all cash at closing, the seller effectively becomes a lender to the buyer, typically earning interest on the deferred amount.

In small business purchase transactions, seller financing is not an edge-case or an unusual concession. It is one of the most frequently used tools to get deals closed, particularly when traditional financing is constrained or when there is a gap between buyer and seller valuation expectations.

What seller financing actually is

In practical terms, seller financing means the seller accepts less than 100% cash at closing and receives a promissory note for the remaining portion. That note is usually paid over several months or years, often with monthly or quarterly payments, and may be fully amortizing or structured with interest-only payments followed by a balloon payment at maturity. In most cases, the note is subordinated to senior debt provided by a bank or SBA lender, though it may still be secured by business assets and supported by personal guarantees.

Why seller financing is so common

Seller financing exists primarily because it solves real-world deal friction (and for industries, business types, or buyers that don't have lending or cash available). One of the most common reasons is valuation gaps. Buyers and sellers often agree on the long-term value of a business but disagree on how much risk exists today. A seller note allows the seller to maintain their price expectation while giving the buyer time to prove the business can support it.

Another reason seller financing is popular is that it makes transactions feasible that otherwise would not close. Many small and mid-sized acquisitions struggle with financing constraints. Lenders may require more equity than the buyer can provide, or they may limit leverage due to industry risk, customer concentration, or economic conditions. A seller note fills that capital gap without forcing the seller to materially reduce the price.

Seller financing also serves as a credibility signal. A seller who is willing to finance part of the transaction is implicitly expressing confidence in the sustainability of the business and the accuracy of the financials. That confidence can make lenders and equity partners more comfortable supporting the deal.

There are also cases where seller financing allows a seller to achieve a higher purchase price. Because the seller earns interest on the deferred portion, they may accept some deferral in exchange for a higher overall valuation or better after-tax outcomes, depending on their circumstances.

What “normal” seller financing looks like in practice

In most market transactions, seller financing represents a minority portion of the total consideration. Survey data from business broker and M&A advisor sources consistently shows that cash at closing remains the dominant component of deal value, often in the range of roughly 75–85% depending on deal size and market conditions. Seller notes commonly fall in the 10–20% range of the purchase price when they are used, though this varies by industry, buyer profile, and perceived risk.

Terms (in adult acquisitions) are typically structured over one to three years. Interest rates are usually higher than senior bank debt because seller notes are subordinated and carry greater risk, although competitive deal environments and high interest rate cycles sometimes compress that spread. Seller notes are often secured by a lien on business assets, domains held in escrow, and supported by personal guarantees, though the exact protections depend heavily on leverage, lender requirements, and negotiating leverage.

In well-structured deals, seller notes also include covenants and reporting or audit requirements designed to protect the seller’s position. These may restrict additional debt, limit distributions, or require regular financial reporting so the seller can monitor risk over the life of the note.

Why 100% seller-financed deals are usually a bad deal for sellers

A proposal that involves 100% seller financing (or close to it) is fundamentally different from a standard seller note. In these deals, the seller receives little or no cash at closing and assumes nearly all of the financial risk of the transaction. From the seller’s perspective, this is rarely a true exit. Instead, the seller is converting an operating business they control into a single concentrated credit exposure they do not.

One of the biggest problems with 100% seller financing is adverse selection. Buyers who request full seller financing often do so because they lack capital or cannot obtain third-party financing. While there are exceptions, the statistical reality is that this buyer pool tends to be riskier. When the buyer has little money invested, incentives are misaligned. The buyer enjoys most of the upside while the seller bears nearly all of the downside if performance falters.

Enforcement risk is another major issue. If a buyer defaults, the seller may need to pursue legal remedies, foreclose on collateral, or attempt to take back a damaged business. Even when contracts are enforceable, the process is expensive, slow, and value-destructive. By the time control is recovered, the business may be worth significantly less than it was at the time of sale.

Finally, there is a substantial opportunity cost. A seller accepting 100% financing is effectively reinvesting the entire purchase price into a single, illiquid, high-risk loan—often at a return that does not adequately compensate for the risk being taken.

For these reasons, 100% seller-financed deals overwhelmingly benefit the buyer (and we do not recommend them). They function more like an option on the business than a true purchase, and sellers should approach them with extreme caution depending on their risk toleratnce.

When heavy seller financing can make sense

There are situations where sellers accept larger-than-normal seller notes, but these deals usually involve strong, well-capitalized buyers, meaningful collateral, substantial guarantees, and pricing that clearly compensates for the added risk. Even then, most sophisticated sellers insist on meaningful cash at close to ensure the buyer has real capital at risk.

In SBA-backed transactions, seller financing is common but tightly regulated. However, SBA-backed financing is rare in adult industry transactions due to banking discrimination. But for grey-area loans or mainstrea-facing businesses or websites, seller notes can sometimes count toward the buyer’s equity injection, but only under strict conditions, such as full payment standby for the life of the SBA loan and limits on how much of the equity requirement the seller note can satisfy. These rules underscore an important principle: even conservative lenders want buyers to have real cash invested in the deal.

Final Takeaway on Seller Financing

Seller financing is a powerful and widely accepted tool in M&A when used appropriately. In most healthy transactions, it represents a minority portion of the purchase price and serves to bridge valuation gaps, facilitate financing, and align incentives. However, when seller financing becomes excessive (especially at or near 100%) the risk shifts almost entirely to the seller, often without adequate compensation.

For sellers, the key is to remember that seller financing is not just a pricing concession; it is a lending decision. Sellers may demand sufficient return, protection (through escrow or brokerage holds), or other alignments before agreeing to finance the buyer’s acquisition of their own business. But sometimes (or most often the case in adult business sales) the "sufficient return" is purely the sale of the business in a buyer pool that is much smaller than that found in mainstream (non-adult) business sales.